Under an ESOP plan options cannot be converted (exercised) into shares until they have vested.
To create a vesting schedule for an ESOP grant in Orchestra you need to be an administrator for the company. In the Orchestra menu, select the 'ESOP & Options' tab and the ESOP pool and grant that you want to set up the vesting schedule for.
Under an ESOP, vesting normally takes the form of:
- Automatic time-based vesting and/or
- Manual/Performance-based vesting
Automatic or time-based vesting can either occur by way of regular or one-off vesting, the use of a cliff or a combination of these:
- Under regular vesting, the options can vest periodically over a period of time (generally monthly, quarterly or yearly).
- For one-off vesting, you choose a specific date when the vesting will occur.
- Using a cliff, a certain amount of options vest after an initial period has passed. For example, 12 months worth of options will only vest 12 months from the start of the ESOP grant.
The below is an example grant with vesting schedule details:
- Grant date: 1st October 2022
Options granted: 240
Automatic vesting schedule: Monthly for 3 years (36 months) with a 1 year (12 month) cliff
This can be set up in Orchestra by clicking on the 'Create schedules' button in the grant and entering the details:
You can hover your mouse over the 'i' icons to find out more information about the vesting parameters. Click 'Create' to save your vesting schedule.
You now have three choices:
- You can set up a second vesting schedule by selecting a 'Schedule Type'.
- You can save this vesting arrangement to use in future on other option grants by choosing 'Save as template'.
- You can save this vesting schedule for this grant only by clicking 'Done'.
The cliff and vesting schedule for this example is displayed in the grant visualisation summary below. Due to the 12 month cliff starting from 1 Oct 2022, the vesting begins on 1 Oct 2023 and is completed on 1 Oct 2025.
For regular automatic vesting, only whole options are vested (no fractions). Orchestra rounds down if there is a fraction of an option.
Manual / performance-based vesting
For manual or performance-based vesting the options will vest on the achievement of some defined milestone or performance hurdle. If the options don't vest (for example, because the milestone is never achieved), they lapse. This means they can no longer be vested or exercised by that employee, and they are returned to the option pool for reallocation.
The manual vesting schedule can be set up in Orchestra, and the administrator will need to approve or decline when the vesting date arrives.
Click the 'Approve' button to approve the vesting.
You can choose to decline the vesting of some of the options if the key performance hurdles were not fully achieved.
Declining the manual vesting returns (lapses) the declined options to the pool for reallocation in new option grants.
Key points on creating and editing vesting schedules
- You can backdate automatic vesting schedules and Orchestra will calculate the vesting events and populate the participant's grant history to the current day.
- You cannot edit a regular automatic vesting schedule that has processed vesting events. If the schedule is incorrect, delete the schedule, delete the vesting events from the grant history, and load a new schedule.
- Editing an automatic vesting schedule that has commenced vesting may result in unusual vesting events.
To halt vesting for an option holder, visit your 'Option grants' page. Click on the 'Settings' wheel under 'Actions' against the relevant option holder, and select 'Halt vesting'. Tick which option grants to stop and click 'Halt vesting'.
Options do not vest if:
- the options are expired
- the option grant has been lapsed as the option holder has departed the company